All that is left to implement the new Foreclosure Prevention Act of 2008, aka The Housing and Economic Recovery Act of 2008, is for President Bush to sign it, and since he rescinded his veto threat, that is pretty much a guarantee that this government intervention that is full of little “pieces of crap” will get passed. As for the overall bill, once again I will state that it does more harm than good as is typical with any government intervention.
The bill is best summed up by this quote:
“This bill has moral hazard written all over it,†Representative Jeff Flake, Republican of Arizona, said during the debate in the House on Wednesday. “We are pretending to chain a monster here, and we are, instead, letting that monster loose.†(Source: NY Times)
If you are bored out of your mind and want to read the full text of the bill (I think this is the most up to date version), then here is the full 694 pages of bureaucracy in action, aka HR 3221. For those of you whom have a life, there is a bit of good, but the vast majority of the bill covers the bad, ugly, and outright insane.
Some of the good points is the taxpayer credit of $7,500 for first time home buyers, though it has to be repaid within 15 years. I think it would have been better just to not require repayment. The elimination of Down Payment Assistance (DAP) programs is also a good thing as they carry higher default rates due to less money “at risk”. It is also helpful to many that the conforming rates will be permanently raised to 115% of the local median home price, capped at $625,000.
The bill, however is loaded with all kinds of sheer “crap”. I do not know where to begin with this one, but let’s get it going with the $300 billion for FHA to refinance loans for struggling borrowers. This doesn’t even come close to helping those who deserve it. It requires lenders to voluntarily write down these loans to 90% or less of the current appraised value. Even the CBO estimates the FHA will only insure $68 billion, or approximately 325,000 homes.
Some other rather ugly items buried in the bill were highlighted by the NY Times:
There are provisions, for example, that grant or extend Section 8 federal housing subsidy eligibility to residents of specific properties in Malden, Mass., and San Francisco. And there is a provision tailored narrowly for Chrysler to ensure that it can benefit from a corporate tax incentive even though the company is now structured as a partnership not a corporation. The bill does not name Chrysler but rather describes an unnamed automobile manufacturer “that will produce in excess of 675,000 automobiles†from Jan. 1 to June 30, 2008.
Why in the heck would a housing rescue bill need this crap?
One of the scariest provisions is the one granting the Federal Deposit Insurance Corporation (FDIC) the authority to create so-called bridge institutions for failing savings associations, mirroring a capability that has existed since 1991 for failed banks. This provision gives them more latitude to keep filed banks like IndyMac Bancorp operating. Having this provision shows Congress is concerned about more banks failing.
The provisions of greatest concern, however, are that of the Paulson Fannie Mae and Freddie Mac bailout plan. The CBO placed $100 billion dollars as the high end of estimates (as I reported earlier), but the provisions increased the allowance up to $800 billion by raising the federal debt limit to $10.6 trillion!!!
Of course, Senate Banking Chairman Christopher Dodd was all over the praising of the bill and was pissed at President Bush for not announcing a signing ceremony:
For Americans out there today with distressed mortgages and worried about their economic future, we hope this legislation could be the first piece of good news in a long time.”
“I think that’s a moment you don’t want to miss by just having a secret, closed-door signing ceremony as if you didn’t do it. I think it’s more important for him to stand up and be heard on this and express through that office the importance of making a difference for people.” (Source: WSJ)
And just what kind of difference do you want to Bush to announce , Senator Dodd? That the government stands ready to intervene and prolong disaster as long as possible so you can get some votes?
Treasury Secretary Henry Paulson was out there with his praise as well:
“These components are orders of magnitude more important to turning the corner on the housing correction.”
And then there’s Barney Fife, I mean Frank. This guy just doesn’t have a clue what he is talking about, yet can’t shut up either. What scares me is Senator Frank is Chairman of the House Committee on Financial Services.
“I would hope that no one would be foreclosed upon between now and October 1st who would have qualified for this program had the effective date been immediate. And that is within your power to do. You can show some forbearance. October 1st is coming, begin the planning, begin the talking with people, but I think it would be a shame, an embarrassment to all of us if people were to lose their homes and the neighborhood deterioration were to be advanced and the economy would suffer because to satisfy CBO and other rules, we delayed this a couple of months. I earnestly hope that we can have that kind of cooperation.†(Source: House Press Release)
First off, while the bill takes effect on October 1, 2008, HUD officials say the provisions likely will not be “effective” until at least the middle of next year. So, are the mortgage servicers supposed to hold off in hopes that their mortgage holdings can be written down and refinanced without even knowing which loans will qualify?
As you can see, this bill being rammed down our throats is hardly a “rescue bill” for housing, though it doesn’t virtually guarantee that Fannie Mae and Freddie Mac will get bailed out at our expense and that local governments can enter real estate investing on our dime as well.
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To bad no solutions are included in the bill. Just Bandaids.